The verdict of HMRC’s appeal to the Supreme Court in Cotter v HMRC has now been released. The case concerned procedural matters as to whether a claim for loss relief was included on a return and therefore under which regime HMRC could raise an enquiry. Whilst this sounds dull, HMRC publicity is announcing at as a victory over “tax avoidance” enabling it to collect an extra £500m.
The Supreme Court found in favour of HMRC in the case of Cotter. However, it was on a very narrow point and hope remains, following the verdict, for taxpayers who calculated their own tax liabilities.
The taxpayer, Mr Cotter, filed his tax return for the 2007/08 tax year on 31 October 2008. He did not make a claim for loss relief and left HMRC to calculate the tax.
In January 2009, Mr Cotter’s accountants wrote to HMRC enclosing a “provisional 2007/08 loss relief claim” with amendments to his 2007/08 tax return. They stated that no further tax would be due for 2007/08 but did not provide a tax calculation.
HMRC amended the return and opened an enquiry into the return but refused to give effect to any credit arising from the loss relief claim. They held that the claim had not been made in a return and as such were not required to give effect to the claim until the enquiry was closed.
HMRC eventually issued legal proceedings for collection of the tax at the County Court, and a series of cases ensued. In February 2012, the Court of Appeal found in favour of Mr Cotter, finding that HMRC would have to raise an enquiry under Section 9A of TMA 1970, thus giving Mr Cotter the right to appeal and postpone the tax until resolution.
Supreme Court Decision
The Supreme Court found that where the taxpayer had included information in his tax return that did not feed into the year’s calculation, it did not mean that HMRC were obliged to give effect to it. The tax return form includes other requests for information which do not impact on the income tax chargeable for the year, and as such the word “return” should refer to “information in the tax return which is submitted ‘for the purpose of establishing the amounts in which a person is chargeable to income tax and capital gains tax’ for the relevant year”.
As Mr Cotter had not calculated the tax due, HMRC were not required to include a claim for 2008/09 loss relief in the 2007/08 assessment.
However, Lord Hodge noted that “matters would have been different if the taxpayer had calculated his liability to income and capital gains tax by…completing the tax calculation summary pages of the tax return”. By including a calculation with the tax return, the calculation then becomes part of the self-assessment and must be enquired into under section 9A. “The Revenue could not go behind the taxpayer’s self-assessment without either amending the return or instituting an enquiry under Section 9A of TMA”; with either option providing the taxpayer with an opportunity to appeal.
It is also worth noting that Lord Hodge suggests that HMRC could remove uncertainty in the tax return by highlighting which boxes are not deemed relevant to that tax year’s calculation.
We now have an interesting situation whereby HMRC have won their appeal on Cotter, but the verdict may not have the level of impact that HMRC were hoping for, as taxpayers who calculated their own tax liabilities ought, from reading the case, to be able to use the decision to their advantage.
It remains to be seen how HMRC will seek to apply the decision to such cases, and whether they will update their tax return forms as suggested by Lord Hodge.
Taxpayers who may be affected by the decision should take further advice before surrendering to a new HMRC demand which may not be valid.